For many people, retiring before the age of 50 is the holy grail and a lifelong goal. With enough smart money moves, these early retirement enthusiasts say, they can set themselves up for life and buy their freedom decades before their peers.
Still, early retirement rarely happens naturally. Like any other big goal, early retirement requires some intricate planning, some serious dedication, and a whole lot of work.
7 Steps to Retire in Your 50's
If your goal is retiring before the age of 50, the time to start laying the groundwork is now. But, where should you start? Here are some steps financial planners say you should implement right away:
#1: Make as much money as you can (and start early).
Retiring early on your regular salary may not be easy if you don’t earn a lot. That’s why it helps to find ways to make more money you can use to get ahead.
By boosting your income through investing, part-time work, or some other means, you can increase the amount of cash you have in store. From there, you can put it to work.
Of course, your early retirement goal will come easier if you start as early as you can as well. If your goal is retiring at 50, you need to start yesterday.
“One factor that makes early retirement much more difficult is the fact you have a lot less time to save,” says San Diego Financial Advisor Taylor Schulte. “While it may not seem like it now, those extra ten or twenty years in the workforce can make a huge difference.”
#2: Build up non-qualified assets.
Earning more and saving more will absolutely help you retire early, but where you stash that money matters, too. According to financial planner Joseph A. Azzopardi of The Well Planned Retirement, the biggest hurdle for early retirees is to effectively bridge the income gap.
“Before clients can tap into social security and other sources of retirement assets, they’re going to need a plan to bridge their income in the early years,” says Azzopardi.
This is where non-qualified assets come into play. Non-qualified assets can include an array of options such as taxable brokerage accounts, cash investments, and Certificates of Deposit.
“If you plan on retiring before age 50 you will need to build up your non-qualified assets,” says financial planner Alex Whitehouse of Whitehouse Wealth Management. “Qualified assets, such as IRAs or 401(k)s, have a 10% penalty if you withdraw funds prior to 59.5. In order to avoid penalties, enough should be saved in non-qualified accounts to provide adequate income until the qualified accounts can be accessed penalty free.”
#3: Invest in a Roth IRA.
Early retirees shouldn’t overlook the Roth IRA, either. Because these accounts are funded with after-tax dollars, you can withdraw your contributions from your Roth IRA at any time without penalty or taxes. If you’re smart and plan to use your Roth IRA for the goal of early retirement, you’ll max out your Roth IRA from now until you’re ready to throw in the towel.
Keep in mind, however, that you can’t withdraw your earnings without a penalty until you’re ages 59 and older unless certain specifications are met.
As of 2017, you can contribute up to $5,500 to a Roth IRA each year provided you meet income requirements. By taking advantage of these accounts, you can build up tax-free money you can access at any time.
#4: Reduce your mortgage payment or pay it off completely.
If you have a thirty-year mortgage and plan to retire before the end of the term, you can also consider refinancing your mortgage so its end date coincides with your ideal retirement date, says Orange County financial planner Anthony Montenegro of Blackmont Advisors.
“This way you have more liquidity to use towards other necessary expenses in retirement,” he says.
If you’re unable to refinance or don’t want to for any reason, you can also pay extra toward the principal of your loan to pay it off early. While it’s possible to retire early while you still owe on your house, it’s a lot easier to afford early retirement when you don’t have a mortgage hanging over your head.
#5: Reduce your spending and learn to live on less.
Retiring early requires savvy investing, but work needs to be done on the spending end, too. In other words, if you want to retire early and stay retired, you must keep your spending in check.
“Get clear about what actually brings you joy in life, and avoid spending money on everything else,” says financial planner for dentists and author of How to Buy a Dental Practice Brian Hanks. “If you can keep your monthly budget low, not only will you need a smaller pile of money to retire with at age 50, but you’ll have the discipline to keep spending low when you are ready to walk away from your job.”
#6: Build multiple streams of income, including passive income.
Most normal people save a certain amount in their work-sponsored 401(k) accounts until they have enough to retire. Early retirees know good and well they need more than the income from their jobs to get by.
According to financial planner Jude Wilson of Wilson Group Financial, one way to set yourself up for retirement is to create multiple income streams, including streams that are passive. With passive income, you can set up a system once and collect checks effortlessly for the long haul.
Passive income or somewhat-passive income streams to consider could be anything from investing in Lending Club or a taxable brokerage account to buying rental property or REITs. The more streams of income you have coming in, the better off you’ll be.
#7: Hire a fee-only financial planner to help you achieve your goals.
Most people who retire early don’t get there by chance. They get there with a carefully crafted plan that took decades to execute, and often with the help of a qualified financial planner.
“One step that must be completed to retire at age 50 is to hire and develop a trusting relationship with an independent fiduciary-based retirement advisor who can create a retirement plan using the best from the securities world and the best from the insurance world,” says Colorado financial planner Matthew Jackson of Solid Wealth Advisors.
“Don’t get fooled into thinking the tools and strategies you use to retire at age 50 will be the best tools and strategies you will use to stay retired for, hopefully, many decades,” he says. While you can do it on your own, having professional help can help you get there faster.
Final Thoughts
While the steps we shared already can definitely help you on your path to retire early, one common theme among advisors I spoke to is that it’s equally important to know your “why.”
“Retiring is age 50 is a great goal, but knowing and affirming the purpose of it all is what will help you make early retirement a reality,” says Minneapolis financial planner Morgan Ranstrom of Trailhead Planners.
Figure out your why, he says, and let it motivate you.
“Whether its traveling the world, spending more time with family, or transitioning into volunteer work you really care about, knowing your ‘why’ will make all the difference.”
Those who do best retiring early have a great sense of purpose in their lives other than a life of leisure, says financial planner Don Roork of AssetDynamics Wealth Management.
“Money is a great tool to fund a purpose, but it cannot help us find a purpose. Once you have the cash, but before you pull the retirement trigger, take the step of finding a retirement purpose that matters just as much as having the money.”
This post was originally published on usnews.com